How can Ukraine fix its customs service?

11:09 | 09/10/2016

The Ukrainian customs service is decrepit and corrupt, obstructing business and sucking revenue out of the government.

Accounting for Hr 263.6 billion ($10 billion) of income for the 2017 budget, which anticipates $27 billion in revenue, the government estimates that corruption in customs deprives the government of nearly $2 billion per year. The country made Hr 202.3 billion ($7.78 billion) off of customs revenue in 2015, according to the Finance Ministry.

Ukraine’s customs service does not only collect import and export tariffs – the agency, which falls under the State Fiscal Service, is also tasked with collecting value-added tax and excise payments on imported goods.

Now, with the government of Prime Minister Volodymyr Groysman settled in after 150 days in office, many are clamoring for reform in the area.

International Monetary Fund chief Christine Lagarde suggested that passing new legislation in the area would be key for the country’s “medium-term sustainability,” and perhaps for receiving the next installment of IMF loans – which now stand at roughly $7 billion out of a potential $17 billion until the start of 2019.

“The focus should be on improving tax and customs administrations,” Lagarde said.

Ukraine has more than 200 customs checkpoints, but trade is wildly uneven. The southern Black Sea and Azov Sea ports are the busiest customs points by declared value of goods, while three of the busiest customs points, measured by number of declarations signed, are on the western border with Poland of the European Union.

The problems

The precise amount of money that Ukraine loses in unpaid customs tariffs and taxes due to smuggling and corruption in the tax service is impossible to estimate.

“Many goods go totally around the system, so it’s impossible to say precisely,” said Nikolai Larin, project manager at the Association of Importers and Exporters. Larin added that the amount of money the customs service submits to the state budget is only about half of the revenues that would be collected if all goods passed through customs.

Groysman said in April that the government loses up to Hr 50 billion ($1.9 billion) due to corruption and smuggling in customs, citing unnamed experts.

Other problems in customs are similar to those that afflict the rest of the civil service. Customs officers are paid salaries as low as $150 each month, for example.

“When your daily earnings could outstrip your monthly legal earnings, then the temptation is great,” said Tetiana Ostrikova, a Samopomich Party member of parliament on the tax and customs policy committee. Ostrikova added that one “hoof” (customs officials’ slang for money earned off the books) would regularly add up to $150 or $200.

Another issue stems from the ability of importers to declare their goods at any customs point they desire, and not the point at which the goods physically enter the country – a system that allows people to deal with customs officials with whom they may have developed a favorable relationship. Since regional customs offices often do not share data, it also means that customs officials will not necessarily know which goods have physically passed through their port.

Lack of information about customs pervades the government due to a quirk in Ukrainian law that restricts all customs information to within the State Fiscal Service.

Ostrikova said that even the deputy finance minister in charge of customs, Yevhen Kapinus, does not have unfettered access to customs data because of this legislation.

“This allows the customs service to keep all of this in a black box,” Ostrikova said.

Yuriy Draganchuk, an adviser to Finance Minister Oleksandr Danyliuk, confirmed that his ministry lacks access to information from the entire State Fiscal Service.

“The information we receive [from the SFS] is impersonal, we don’t receive information about concrete enterprises and people,” he said. “We plan to make a completely separate IT structure that combines information from the SFS, treasury and our ministry.”

Yuriy Draganchuk, customs advisor to Finance Minister Oleksandr Danyliuk, speaks at the Finance Ministry in Kyiv on Sept. 21. Draganchuk does not have access to data from the customs service, making it difficult to know what is going on. (Anastasia Vlasova)

Groysman’s government has created a system of “mobile groups” to attempt to solve corruption in the customs service where it appears, in what has been touted as an aggressive effort to halt smuggling.

There are 20 groups, whose teams are formed by employees from the National Anti-corruption Bureau of Ukraine, the National Police and the State Fiscal Service. The teams are supposed to travel from customs point to customs point, rooting out smuggling rackets.

But Ostrikova has been disappointed with the initiative’s progress so far, saying that smugglers were often informed of the group’s arrival in advance.

“They don’t wait up for the mobile groups,” she said of the smugglers.

The European way

Much of the current push to improve the customs service revolves around bringing the institution up to European Union standards, both in terms of how its employees act and in terms of the data to which they have access.

Andrew Zablotskyi, a counsel at law firm Sayenko Kharenko specializing in international trade and agriculture, said that Ukraine’s association agreement with the European Union-mandated certain legal changes, including introducing a requirement that importers need to declare goods at the border points at which the goods enter.

“The EU says that if you signed the EU association agreement, you need to comply with the rules… and place the state control in frontier offices,” Zablotskyi said.

He added that a serious problem with adopting this law was a lack of money in the state budget to fund the changes, and the fact that the government would need to consolidate its sanitary and health control systems at the border points, and not in the main cities, where they are currently located.

One proposal to modernize the customs service would have seen part of the institution’s functionality outsourced to British aid organization Crown Agents.

But Ostrikova said that finding the right people was not the problem.

“We have the people,” Ostrikova said. “Our customs over the past 25 years turned into a means for living. Everyone wants to earn more off of customs.”

Achieving independence

Ostrikova is proposing that Ukraine run a NABU-style contest for new customs officials, by which they would be vetted as not having participated in corrupt activities.

“There should be new people,” Ostrikova said. “It should be people with a different consciousness.”

The deputy went on to say that information sharing both internally with other branches of the government and with European authorities would help cut off the air to many schemes, which rely on customs officials being ignorant of the true value of a given good.

But Ostrikova added that European officials were wary of sharing their customs data with Ukraine because they had concerns over information security.

“We need to back up these systems according to European standards,” Ostrikova said.

Establishing an effective post-audit system would also go a long way to reducing corruption in customs. The country currently has 15 civil servants allotted to post-auditing customs, by which the government is supposed to verify that all activity at a given border point is in compliance with customs legislation.

“Our partners from the European Union and European Commission are imposing this on us,” Ostrikova said. “It’s a tool that works in the entire civilized world.”

Danyliuk’s predecessor, Natalie Jaresko, was not able to achieve customs and tax reform during her 16 months in office ending in April. But Danyliuk, at least by his public statements, has made renovating the service a priority. Draganchuk, the Danyliuk advisor, blamed the ministry’s inability to reform so far on parliament’s failure to pass the necessary legislation. “We’re doing it, but it’s going to take a long time.”

Ostrikova said that while she sees Danyliuk’s desire to change the situation, the customs service is fighting back.

“I see rabid opposition from the tax service to give the Finance Ministry access even to these databases, to give objective information,” Ostrikova said. “They aren’t doing this independently, but because of their masters in high office.”

Correction: This story has been updated to reflect that Andrew Zablotskyi is a counsel at Sayenko Kharenko specializing in international trade and agriculture.

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